With the market being down enough to make us all feel the pain, it's natural to wonder whether this is just the beginning of the business cycle turning down, the end of another bubble, or the start of world realignment. Your investment strategy and plans for the future depend on which alternative you think we are encountering.
Until recently I had been of the opinion that this was just he beginning of the business cycle and that we were going to see hard times for the next year or two because world demand for everything is soft and getting softer, and that it's going to be harder times than most people expect, but it's simply the business cycle and not another world-wide panic brought about by a bursting global bubble. And that's what we've seen so far. The markets are down in anticipation of poor corporate earnings and they have a ways to go as companies cut back, earnings decline further, unemployment rises and it takes a while for the business cycle to turn upward again.
More recently I read two articles that have me rethinking my analysis. The first is by David Stockman, briefly of Reagan Administration fame, who is shouting that the Chinese economy is a Ponzi scheme that is going to collapse some time in the near future. I've read enough other articles suggesting the same thing that I stopped to check this one out. I think he's right. But if he is, the collapse of China is not yet factored into the market. The lesson of The Big Short is that bubbles can defy gravity for longer than seems possible. I think China is defying gravity and we should all reevaluate our investments accordingly.
The Great China Ponzi—-An Economic And Financial Trainwreck Which Will Rattle The World | David Stockman's Contra Corner
Frankly, I'm not sure what investment is secure from a Chinese implosion. Gold will probably go down with reduced demand and increased supply as Chinese dump their gold holdings. Maybe Dollars under the mattress is a good investment.
The second article is by Thomas Friedman who isn't really an economist like Stockman, but he's a professional analysts and reporter, and he has good insights. He's not predicting the end of the world as we know it, but he's pointing out some long term trends that could come to pass.
http://www.nytimes.com/2016/01/20/opinion/what-if.html?_r=0
The point is that as you make your investment decisions, you should be open to the possibility that China is a Ponzi scheme about to go bust and that America's special place in the world, indeed the world's post-WWII trajectory toward greater prosperity, is an era about to end. At the very least these are risks to factor into your plans.